Cattle producers brace for higher feed costs

Drought, recalls take toll | Feeder cattle prices fall amid rising corn, barley prices; herd size shrinks to adjust to market

STRATHMORE, Alta. — The drought in the U.S. corn belt and a month long closure of the XL Foods plant in Brooks, Alta., have had wide ranging affects on North American beef markets.

As the corn crop shriveled, the price per bushel increased by $3 from June to July to hit $8, said market analyst Anne Dunford.

“In this period of time, if you were feeding yearlings it was going to add $150-$200 to your cost of gain to feed a yearling and if you were feeding a calf it could add $400 to that calf,” she said at an Alberta Beef Producers meeting in Strathmore Nov. 1.

Canadian feeders were caught in the maelstrom because barley prices follow U.S. corn.

Then in September, calf prices dropped by 15 cents per hundredweight when XL lost its licence to operate. Auction market volumes fell 30 percent because of uncertainty as producers held cattle rather than risk shipping to nervous buyers.

Feeder calf prices normally drop in the fall because of the high volume of cattle moving to market, but a ripple effect was felt across the country as the large packing plant went out of commission.

Fats were $112-$114 per cwt. at the end of October and should improve now that XL is open. However, they are not going to increase enough for feedlots to break even.

Cattle sold on the cash market in the feedlot sector this fall probably lost as much as $200 per head if operators did not manage their risk.

A calf put on feed in Lethbridge Nov. 1 needs a price of $125 per cwt. by the time it reaches market weight to break even.

“For the feedlots, this is a predicament I don’t see changing for some time,” Dunford said.

Tight feeder cattle supply exacerbates the problem.

The Canadian cow herd has shrunk by 1.5 million head since 2005. Some producers have been retaining heifers, but in many cases that is to replace aging cows that could be as old as 15 or 16 years. The result is fewer calves being born.

Canfax’s cattle-on feed report for Oct. 1 reported the smallest inventory since it started tracking placements in Alberta and Saskatchewan.

The same situation prevails in the United States. A steady decline since 2000 means there are 4.5 million fewer calves to place in feedlots.

“It’ll take a while to change this around,” Dunford said.

Canada finished 3.5 million cattle a year from the late 1990s to 2007, but this year only 2.75 million head will be fattened. Canada is facing its smallest level of beef production since 1995, even with record sized carcass weights.

Tight feeder supply strengthens calf prices and retail beef prices but leaves feedlots and packers with negative margins.

It could also cause Canada to import more beef, especially product for grinding and further processing.

Less beef is also available for export. Dunford estimates exports could be eight percent lower, and perhaps 10 percent lower with XL closed to export.

“With tight supplies we are going to have trouble meeting some of the requirements that we need on an export basis,” she said.

Consequently, Canada could become a net importer of beef again, a position it hasn’t been in since the mid-1980s.

As small cattle supply pushes beef prices higher, that pushs up retail prices for all meats.

Beef and chicken prices are up six percent at the counter this year and pork is up by seven percent, but it is hard to say how long consumers will continue to pay more.

Wholesale Choice cutouts hit $200 per hundredweight three times this year. But each time, that stifled demand and prices dropped immediately.

Considering that the overall economy remains weak, beef prices are unlikely to peak again until spring. For fat cattle prices to rally, cut-out value will have to hit $210.

“Supply says we should (see higher beef prices), but can the consumer foot the bill?” she said.

The basis between Canadian and U.S. prices has been weak this year. The Alberta cash price was $10 to $15 less than the Nebraska price, although Dunford expects this will improve toward the end of the year.

All that volatility means producers, especially margin operators such as feedlots, must find some protection.

“Profits are going to depend on the ability to manage risk and be disciplined,” she said.

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